Saturday, August 23, 2008

Commission Free Forex Trading

Today, there are several forex brokers that sometimes tout all of their services as being completely commission free. By taking a closer glance at the forex market’s inner workings, you will be able to reveal that foreign exchange trading is anything but free. In all actuality, the currency market is considered to be among the most expensive markets to participate in trading in.

Most of the foreign exchange brokers aren’t going to charge a commission just to transact a trade. Often, these forex brokers market all of their services as being completely free of making commission, but this particular claim isn’t true in its entirety and it can often be misleading.

Within the foreign exchange market, similar to any other financial market, there is always going to be a bid price and an ask price. In case you are unfamiliar with these terms, the bid price is going to relate to the price at which you are able to sell a particular currency pair and the ask price is going to be the price at which you are able to purchase a particular currency pair. Keep in mind that the bid and ask prices do fluctuate, or move lower and higher, as there is a fluctuation in the currency pair.

Another term that you need to be aware of as a forex trader is the term “spread”. The term “spread” is used to describe the difference between the bid price and the ask price. As a forex trader, you are going to pay this difference each and every time that you transact a currency pair trade. Bear in mind, that the wider the spread is, the more you are going to pay in order to place the trade.

Most forex brokers offer a spread for the currency pair EUR/USD that amounts to twenty or thirty dollars for one single standard lot. However, it is a lot higher for the currency pairs that are more liquid like the cross rates, such as the currency pair GBP/JPY. The spreads for this particularly famous cross rate can extend upwards of eighty dollars for one single standard lot.

Normally, a standard lot is considered to be around one thousand dollars in equity. Take the time to think about this for a moment, one single trade in the currency pair GBP/JPY is going to cost you around eight percent right off gate. When you put this into another prospective, the moment that you click a trade within the currency pair GBP/JPY, you are going to be down by eight percent right from the very start. One thing that’s definitely true about this trade is it is expensive.

So, in all actuality, foreign exchange trading isn’t commission free. In fact, the spread between the bid and ask prices is basically the commission. The spread is also an extremely high transaction cost or commission, when it is compared to all of the other markets such as mutual funds, stocks, options, bonds and even futures, specifically when you are looking at all of the spreads that are associated with the exotics, cross rates and the other liquid currency pairs.

Tags: foreign exchange trading, forex brokers, spreads, liquid currency pairs, exotics, cross rates,

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